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Right. If you double the money supply by dropping interest rates, the people with the new money are the credit worthy people who can afford to take out new debt

Right. If you double the money supply by dropping interest rates, the people with the new money are the credit worthy people who can afford to take out new debt(though mostly companies). The things that those people demand are what rises in prices. This is the Cantillion Effect, basic supply and demand flows. Since the people who can take out new debt are wealthy, the things that the wealthy buy go up. They don't need more apples, so the demand for apples stays the same, and the prices of apples stays the same. Instead they take that debt and pour it into the market(mostly buybacks) and other savings. So we don't end up seeing consumer prices change much. Each person is attempting to maximize their long-term utility, and so long as inflation stays in check their best option is to keep it in the market growing ever more. Money is useless if you can't eventually spend it for utility. Each billionaire/company is planning what to do with their wealth. Some will create rockets, others will fund disease research hoping to get their name into the history books. It's always and will always be about the utility. Like the Martingale Betting System has shown, you can not remove the risk by shifting the betting sizes around. As the money supply increase more "energy" is added to the system. It becomes harder and harder to control it. As it increases, the power of each individual to effect the entire system increases. In the 1970's the richest person had $6B, now the richest person has $177B, an increase of 30 times. By 2170 the richest person could have 30x that. If there is a reason to believe that selling their stocks will yield greater utility, then the wealthy would figure it out, and the first person who acts would win(like what happened with the banks handling Archegos), second would do worse, most would get wiped out, including all the non-wealthy. It would be like a dam collapsing all at once. Sometimes all it takes for the dam to burst is a small trickle. But all that energy was always being stored in the reservoir. But you better believe that the Fed understands this, and is doing everything in their power to keep the system under control. The problem is though, they need for investments to be the biggest long-term utility creator, but that only increases the energy. The more they keep it going, the more unstable it becomes.

jbay808 5y ago
Exactly! And borrowing money to spend on consumables like apples is clearly risky borrowing. How will you pay it back once you've eaten the apples? So the lender is very strict and the rates are high. When you borrow money for an asset, it looks safe. You aren't spending money you don't have. You haven't really spent anything; you can always sell the asset to repay your debt! And in the meantime, you reap the gains as the asset goes up. So mortgages are cheap and the lender works hard to help you qualify. But like you say the risk can only be shuffled into bigger gambles, not removed. You can't make risk-free money by borrowing money cheaply to buy growing assets forever. If the assets are increasingly bought with debt, then their price will correlate inversely with the cost of borrowing. So right when borrowing gets expensive and you want to sell your assets to pay back your debts, the asset price also drops because everyone else is doing the same thing. It's very hard to de-risk because almost every asset ends up correlated to the same thing: the debt that people are buying those assets with. I do believe the Fed understands this (and more relevant to me, the Bank of Canada). They know the game they're playing, and I think they're very good at it. And they know the psychology. They believe the economy will be better off with a period of transient inflation that levels off, because it will get oversized debts down. They're hoping they can hold off on rate increases before that happens, so that rates don't go up until debts are under control. And they're hoping the lenders will go along with it. Here in Canada we're seeing pseudo interest rate increases via the "stress test", where you have to prove you can afford a 5.8% mortgage in order to get a 2% mortgage, because the government needs to keep debt servicing costs low as they inflate them away without incentivizing everyone to load up on even more of them. That net doesn't catch everybody, but it should protect the most vulnerable. It's a very delicate balancing act. I don't know if it will work. I think we'll find out soon.

jbay808 5y ago

Exactly! And borrowing money to spend on consumables like apples is clearly risky borrowing. How will you pay it back once you've eaten the apples? So the lender is very strict and the rates are high. When you borrow money for an asset, it looks safe. You aren't spending money you don't have. You haven't really spent anything; you can always sell the asset to repay your debt! And in the meantime, you reap the gains as the asset goes up. So mortgages are cheap and the lender works hard to help you qualify. But like you say the risk can only be shuffled into bigger gambles, not removed. You can't make risk-free money by borrowing money cheaply to buy growing assets forever. If the assets are increasingly bought with debt, then their price will correlate inversely with the cost of borrowing. So right when borrowing gets expensive and you want to sell your assets to pay back your debts, the asset price also drops because everyone else is doing the same thing. It's very hard to de-risk because almost every asset ends up correlated to the same thing: the debt that people are buying those assets with. I do believe the Fed understands this (and more relevant to me, the Bank of Canada). They know the game they're playing, and I think they're very good at it. And they know the psychology. They believe the economy will be better off with a period of transient inflation that levels off, because it will get oversized debts down. They're hoping they can hold off on rate increases before that happens, so that rates don't go up until debts are under control. And they're hoping the lenders will go along with it. Here in Canada we're seeing pseudo interest rate increases via the "stress test", where you have to prove you can afford a 5.8% mortgage in order to get a 2% mortgage, because the government needs to keep debt servicing costs low as they inflate them away without incentivizing everyone to load up on even more of them. That net doesn't catch everybody, but it should protect the most vulnerable. It's a very delicate balancing act. I don't know if it will work. I think we'll find out soon.